As the swing of the pendulum went the other way, the greenback traced US Treasury bond yield downwards from a five-year highs last week, rending its allure unattractive to foreign investors. In the past weeks, the US currency was radiant as it rode the back of robust US economic data that boosted the 10-year note?s yield to 5.33 percent, knocking down the euro to a three-month low.

Armed with a very light calendar of US economic data this week and plagued by the retreat of bond yield, the dollar got no support and surrendered its gains. Investors had already ditched any hope that the FED would hike up interest rates this year. Therefore, they saw no reason to buy dollars causing the latter to dip against a basket of major currencies. To make matters worse for the greenback, the spread of implied US interest rate in December 2008 over the euro zone had been brought down to 60 basis points from 70 basis points last week. In addition, futures market were factoring that the FED would keep interest rates on hold at 5.25 percent until the end of the year.

Towards mid-week, the greenback got pumped up by strong US manufacturing sector that offset concerns about weakness in the US housing sectors. In addition, market players were anticipating a rise in bond yield on long dated US bonds. Higher US bond yield together with signs that the economy was emerging from a first-quarter funk had erased the chance of a FED rate cut although woes in the housing sectors remained a concern.

At the end of the week, we noted some broad selling of the US currency as investors were spooked at hedge fund failures related to rising US subprime mortgage defaults. On Wall Street, US stock indexes, which turned negative in late trading after positing earlier gains, were also pressured by a rebound in oil futures. Against the Mauritian rupee, the dollar was trading at MUR 32.045 yesterday as compared to MUR 32.045 a week earlier.

Fabulous week for the Pound

Sterling had a fabulous week, hitting for a brief moment the psychological level of $2.0. Investors, enamored by high-yield, did not hesitate to swap low yielding currencies like the yen to buy the pound. The UK?s currency got another boost as US government bond yields retreated from five-year highs. In addition, Sterling vaulted to new heights after the Bank of England minutes gave clues that a rate hike could come as soon as July.

In the last Monetary Policy Committee meeting, BoE Governor Mervyn King as well as three other officials, wanted to raise interest rates beyond 5.5 percent. They were, however, outvoted by the other members. According to analysts, these minutes showed that a hike would be more likely to happen in July itself as opposed to August. Against the Mauritian rupee, the Sterling was trading at MUR 64.04 yesterday as compared to MUR 63.14 a week earlier.

The yen hovered near all-time lows against the dollar as investors took advantage of the low-yielding Japanese currency to purchase higher yielding currencies. Market players, propelled by robust global economic growth and positive sentiments in the bond market invested massively into carry trades. The Japanese currency got no respite throughout the week even when BoJ Governor Toshihiko Fukui stated that the central bank could raise rates even if core consumer prices were still falling as long as inflationary pressures were upbeat. This erased market speculation of a hike in July from 0.5 to 0.75 percent in July. Against the Mauritian rupee, the yen was trading at MUR 25.95 as compared to MUR 25.92 a week earlier.

Vassan Caleemootoo Contributed by HSBC